if the euro collapses?, page-48

'Either in a union or not. Does Germany want this badly enough. Will member states give their sovereign right to determine their national budgets independently to, basically speaking, Germany?

How desperate are EZ countries to further integrate and to give control to another?

Tough questions for sure.

Will economics triumph over nationalism?'

My answer to Thorburn

Basically, the euro area is suffering from three illnesses at once, and the symptoms are connected to one underlying pain that is hard to measure: fear. First, interest rates on government bonds of various European government have spiked over the past months, reaching levels around "magic" 7 percent where debt payments may become unsustainable. Second, great fiscal austerity measures depress economic growth and destroy business and consumer confidence. Third, the access to wholesale funding market is drying up rapidly.
This increases stress on European banks who refuse to lend to each other and pulling away deposits from the peripheral countries' banks. So, the financial institutions are under severe pressure to hold more capital and so liquidity is evaporating.

How to save the euro area? The German Council of Economic Experts proposed to "mutualise all euro-zone debt above 60% of each country’s GDP, and to set aside a trance of tax revenue to pay it off over the next 25 years."

Basically this would mean a transfer union or nearly a fiscal union in Europe. Let us calculate what this plan really means and how it can be a solution to the euro zone crisis.
According to the IMF Statistics, in 2011 the total government debt as a share of total GDP in the euro zone stands at 78 percent (not bad after all in comparison to e.g. Japan or the United States with debt ratios of respectively 234 and 99 percent). In other words, the new Eurobonds will cover a package of debt obligations for various euro countries that total around 19 percent of the euro zone's GDP.

Now the Dutch Economist calculates how the new Eurobond debt package actually looks on per country basis: What is interesting about this proposal is that using the IMF statistics, cui bono? Well, the countries that benefit the most are:

1. Spain
2. Italy
3. Germany
4. the Netherlands
5. France

How can this even be possible? Aren’t countries like Greece, Portugal and Ireland very excited about such a plan? Well, the difference lies in the size of the economy (overall GDP) and relative official debts. Surely, these peripheral countries have above average debt levels and will receive a nice mix of their debts with other countries where they will be proportionally overrepresented. However, given the that the listed countries (Germany, France, Italy, Spain and the Netherlands) have the largest GDP and debt levels above 60 percent, they will benefit the most in net terms.

Still, apart for who benefits there are many problems with a transfer union with combined Euro-debts. Just think about the moral hazard it may impose (but, this can be captured with direct taxing). Or, think about how unfair it is if Austria and Finland need to pay for Spanish and Italian woes. Maybe countries should be dropped before we impose the plan (e.g. Greece, who's offical and unoffical debt stats don't match).

So until there is no firm commitment from the EZ governments to balance their own budget and implement structural economic reforms, Merkel and 10 of the 17 EZ member states oppose the above solution. So far - only Spain and Germany has legislated in parliament to implement balanced budget rules and debt breaks.